There is strong traction in Mahindra Lifespace?s (MLL?s) key verticals such as (i) residential development and (ii) Special Economic Zones (SEZ) and Domestic Tariff Areas (DTA). Since FY10, MLL launched 1.8 msf of residential projects and posted sales of Rs 9.4 bn, providing robust cash flow visibility. MLL plans to launch another 3msf (million sq ft) of residential projects over 6-12 months.

MLL is also seeing momentum at its Chennai and Jaipur SEZs. While the Chennai SEZ is at an advanced stage of monetisation, sale of the processing area is underway in Jaipur SEZ. Monetisation of its residential vertical is expected in 15-18 months.

Since its inception, MLL has delivered 5.9 msf of development projects and currently 2.7msf of saleable area is under construction. It has a land bank of 7.3 msf (excluding residential projects in Chennai, which is part of the Chennai SEZ). MLL plans to launch 3 msf of residential projects (out of its 7.3 msf of forthcoming projects) over 6-12 months. The management indicated that MLL aimed to monetise its land bank over 3-4 years.

MLL has two key ongoing SEZ projects in Chennai and Jaipur. The Chennai SEZ is in an advanced stage of monetisation with focus now on monetising the residential and institutional areas. The Jaipur SEZ is in an early phase of monetisation.

In the Jaipur SEZ, Mahindra World City is proposed to be developed as a multi-product SEZ and DTA over 3,000 acres. The company has acquired 2,636 acres (as on March 2010) and is acquiring the remaining land. The project has received notifications for three SEZs—IT/ITES, light engineering (including automobile and automobile components) and handicrafts. The company plans to expand coverage to include segments such as gems and jewelry, apparel and logistics. The management said 350 acres of the Jaipur SEZ had been sold out with the recent realisations being Rs 6 m-7m /acre.

MLL plans to launch another integrated development in Chennai. This 1,000-acre project in north Chennai, is home to engineering and automobile companies. MLL is also acquiring 3,000 acres of an SEZ near Pune for a large format development. We expect clarity on the acquisitions to emerge in next 6-9 months.

Project additions to add Rs 40/ share to MLL NAV.

MLL reported Q2FY11 results above our expectations. Standalone revenue increased 40% YoY to Rs 890 m (against our estimate of Rs 783 m) and net profit increased 21.7% YoY to Rs 247m. Ebitda (earnings before interest, taxes,depreciation and amortisation) grew 26% to Rs 234 m and Ebitda margins were 26% (vs 23% in Q2FY10). MLL?s consolidated H1FY11 revenue was up 46% to Rs 2.1bn (vs Rs 1.4 bn in H1FY10) and consolidated net profit grew a sharp 104% to Rs 438.5m (vs Rs 214.5 m). Sale of residential units in H1FY11 was Rs 3.5 bn, up 129% from Rs 1.5 bn in H1FY10.

Revenue and PAT to witness 40% and 44% CAGR (compound annual growth rate) over FY10-12, respectively. We expect revenue to increase by 40% CAGR from Rs 4.2 bn in FY10 to Rs 8.2 bn in FY12. We estimate revenue from Chennai and Jaipur SEZs to increase from Rs 972 m in FY10 to Rs2 bn by FY12, a CAGR of 44%. MLL?s net profit is expected to grow 45% CAGR to Rs 1.6 bn in FY12.

The stock trades at (i) a 20% discount to its SOTP value of Rs 600/share, (ii) 1.6x FY12e adjusted book value of Rs 300 and (iii) 12x of FY12E EPS of 40/share. Buy.